China could be BHP partner and not rival in Rio deal

Chinese resource firms are unlikely to launch a counter-offer for Rio Tinto, but may hope to team up with BHP Billiton to clinch the deal, bankers said on Friday.

Chinese companies are aware that Australia is highly unlikely to endorse a foreign takeover of a major Australian resource company, bankers said, noting Royal Dutch/Shell's previous attempt to take over Australian oil and gas producer Woodside had been blocked by the Australian government.

But the possibility of a Chinese partnership with BHP to take over Rio should not be ruled out because BHP may need Chinese financing to sweeten its existing $140 billion (66.3 billion pound) all-share offer that has been rejected by Rio, said bankers who are not involved in the deal.

Chinese state companies, in return, could secure a better access to metals ranging from copper to iron ores desperately needed by their resource-starved country to fuel its 10 percent a year economic growth, they told Reuters.

Such a partnership could also help Chinese companies purchase assets that would have to be divested by BHP and Rio under anti-trust laws if the merger goes through, they added.

I don't think the Chinese would bid for Rio in competition with BHP. That could raise some real issues not just in Australia but elsewhere. I would think they would partner up with one or another, said a senior banker.

BHP may partner with somebody in order to sweeten the bid, the banker, who asked not to be identified, added, citing Aluminium Corp of China Ltd (Chalco), the country's largest aluminium producer, and China Investment Corp, the country's newly created sovereign fund, as a possible candidate.

Officials at Chalco, whose parent aims to build itself into what it calls an international, multi-metals mining company, were not available for comments.

There has been a huge drive by the Chinese producers to secure access to commodities products through M&As. There would be a natural conclusion that one or more Chinese companies would look into a deal like this, another banker said.

However, a source with knowledge of BHP's bidding strategy for Rio said the partnership idea remains a wishful thinking of investment bankers as it's too early to judge whether BHP would need a partner to complete the takeover.

You've got every bank in the world right now who is not mandated to this transaction already trying to find themselves a client, the source said, but declined to elaborate.

Global mining leader BHP said on Thursday it had made a long-awaited bid approach to Rio Tinto in a move aimed at creating a $350 billion-plus mining giant, but Rio rejected the all-share proposal as too low.

Some analysts said on Friday Rio Tinto could cost more than $170 billion if it is taken over. Some of them said an array of interested parties, from Chinese to Russian companies, had the potential to launch rival offers.

Bankers and analysts said that consuming countries like South Korea and China would certainly not be happy to see such a merger going through as that would undermine their bargaining power. Chinese steelmakers are already facing another major price hike in iron ore imports next year.

A marriage of BHP and Rio would create a single force unprecedented in the mining sector -- capable of controlling the worldwide ebb and flow of armada-sized fleet loads of iron ore, copper, coal and dozens of other industrial-use staples.

China has been scouring the world for natural resources from oil and gas to iron ores.

Its oil majors, China National Petroleum Corp (CNPC), parent of PetroChina, CNOOC Ltd, and Sinopec Group, parent of Sinopec Corp have made a series of multi-billion dollar acquisitions in recent years.

By contrast, no Chinese mining firms have made any significant overseas acquisitions because they are too small to do it compared with the Chinese oil giants.

Bankers also noted that BHP may not need a partner to buy Rio. It has the financial muscle to do this by itself unless Rio asks for a significant increase in its bid, they said.

Bankers said it would be highly unlikely for a Chinese oil company such as PetroChina to buy into Rio because that's not the company's strategy.

Indeed, many international oil and gas companies diversified into the mining sector in the early '80s', but they had divested most of those assets about 10 years later, another senior investment banker said.